China Manufacturing Sector Contracts 3rd Month Amid Trade Uncertainty

China’s manufacturing sector contracted for the third consecutive month in June, with the Purchasing Managers’ Index (PMI) standing at 49.7, a slight improvement from May’s 49.5 but still below the 50 threshold that indicates expansion. This ongoing contraction reflects the challenges faced by the world’s second-largest economy, which is grappling with a fragile trade deal with the United States and a cooling property market.

The manufacturing PMI first dipped below the growth threshold in April, following a surge in tariffs on certain goods due to escalating trade tensions with the US. Although the two nations recently agreed to roll back some of these tariffs, the trade outlook remains uncertain. This uncertainty is compounded by deflation risks and a property market that continues to lose momentum.

Consumer price growth has been decelerating for four consecutive months through May, indicating weakening domestic demand. Analysts point to deepening deflation and intensifying price wars across various sectors as significant concerns. Exports to the US, a key indicator of trade health, plummeted in May, although overall exports showed an increase. The PMI’s export orders index remained in contraction territory at 47.7 in June, although it showed improvement from April’s low point.

Despite the challenges, there are signs of resilience. Retail sales in May showed an uptick, and the non-manufacturing PMI, which covers services and construction, rose to 50.5 from 50.3 in May. The construction PMI climbed to 52.8, and the composite PMI for both services and manufacturing stood at 50.7, indicating stability in these sectors.

However, the labor market remains under stress, and deflationary pressures persist. Policymakers are likely to monitor the trade situation closely, with some export improvements noted. The recent trade truce has not fully alleviated supply-chain disruptions, as export controls on rare-earth metals and other strategic materials continue to impact various industries. These controls, implemented in response to US tariffs, have led to additional inspections and third-party testing, causing delays and logistical challenges for companies.

In summary, China’s manufacturing sector faces significant headwinds, with ongoing trade tensions, deflation risks, and a cooling property market all contributing to the contraction. While there are signs of resilience in certain sectors, the overall economic outlook remains uncertain, and policymakers will need to navigate these challenges carefully to support growth.